Dow set to plunge over 400 points on fear of fresh US-China tensions as Canada arrested Huawei CFO for the US extradition

The US stock market set to plunge in the opening trade on fear of fresh US-China tensions as Canada arrested Huawei CFO at the US request for extradition. As per the report, the CFO, Meng Wanzhou, was arrested on Saturday in Canada at the request of the US over sanction issue The arrest of Meng, a daughter of the company’s founder, is likely to escalate tensions between the US and China over technology and trade truce issues, just as the two countries appeared to have reached a trade ceasefire.

It’s also very strange about Trump’s silence on the issue despite that fact that the arrest occurred on the same day with his dinner meeting with China’s president Xi. As a result, the SPX-500 made a panic low of 2650.25 in morning Asian session in an unusually high volume. The selling was so intense it forced CME Group to intermittently pause trading.

But the market was apparently stabilized from panic selling after the Chinese embassy in Canada said China has complained to the US and Canada and asked them to "rectify wrongdoings" and free the Huawei CFO. The embassy said it will closely monitoring the development of the matter and take all actions to protect the legitimate interests of Chinese citizens.

In a statement on its embassy, China says that it firmly opposes and strongly protests Canada’s arrest of a Chinese citizen who didn’t violate any US, Canada laws, adding that the arrest upon the US’s request severely violates human rights.

The Embassy of China in Canada said that it resolutely opposes Meng's arrest and demands her immediate release: "The Canadian police, at the request of the United States, arrested a Chinese citizen who had not violated any U.S. or Canadian law. China has already made solemn representations to the United States and Canada, demanding they immediately correct their wrong behavior and restore Ms. Meng Wanzhou's freedom”.

Meanwhile, China’s chief executive of the telecom industry said: “Meng has become a hostage in the China-US trade war. The US and Canada have no right to detain a Chinese citizen without providing any legal evidence”.

The Chinese tech/telecom company Huawei, in a statement, said the arrest was made on behalf of the US, so Meng could be extradited to “face unspecified charges” in the Eastern District of New York: “The company has been provided very little information regarding the charges and is not aware of any wrongdoing by Ms. Meng. The company believes the Canadian and the US legal systems will ultimately reach a just conclusion. Huawei complies with all applicable laws and regulations where it operates, including applicable export control and sanction laws and regulations of the UN, US, and EU”.

The US DOJ (Department of Justice) said: "Wanzhou Meng was arrested in Vancouver on December 1. She is sought for extradition by the United States, and a bail hearing has been set for Friday. As there is a publication ban in effect, we cannot provide any further detail at this time. The ban was sought by Ms. Meng”.

The market is concerned about the durability of the US-China temporary trade truce and if that arrest is linked with tech theft then that translates worst for the US-China relations and the timing is also very worst. On one hand, Trump is stating that trade talks are going really well with China and then on the other, the Trump admin is trying to prosecute the CFO of one of its biggest Chinese tech firms.

As per the report, the arrest is on suspicion that Meng violated the US sanctions against Iran by selling telecommunications equipment. There is report alleging closer ties to between Huawei and a company that sold HP equipment in Iran. As a reminder, Huawei has frequently been the focus of US intelligence for trying to gain access to the 5G network. The company is the world's second-largest maker of telecommunications equipment.

There is also another report that the hackers behind the breach at Marriott International hotel left clues suggesting they were working for the Chinese government intelligence-gathering operation. The report suggests that the private investigators looking into the data breach have found hacking tools, techniques, and procedures previously used in attacks attributed to known Chinese hackers.

The risk-on mood slightly improved in the EU session opening on China trade optimism after China’s MOFCOM said China is closely monitoring changes in trade conditions but sees strong trade momentum despite rising protectionism. China also said “it’s very confident of reaching agreement on trade with the US in a 90-day period. Trump-Xi meeting was successful and reached important consensus on agriculture, energy, and cars. Whatever that has been agreed will be immediately implemented and the ultimate goal in US-China negotiations is to remove all tariffs”.

China also urged the US and Canada to uphold rights in Huawei case and pointed out Canada, the US have yet to clarify the reason for the arrest of Meng. China also confirmed that the Chinese consulate has been providing assistance to the Huawei's CFO Meng.

Apart from US-China tensions, energies are also in stress as oil tumbled by almost -5% to a low of 50.24 after Saudi Arabia said producers were working towards a deal to cut output that could fall short of market expectations. Oil tumbled Thursday morning after Saudi Arabia's energy minister said that a cut of 1 mbpd would be enough for OPEC+, which is lower than earlier Saudi comments and the market estimate of 1.3 mbpd cut.

Technically, whatever may be the China trade and yield curve narrative, SPX-500 has to sustain over 2735 for a further rally to 2765/2780*-2800/2815 and 2835*/2860-2875/2895 in the near term (under bullish case scenario).

On the flip side, sustaining below 2725-2680 SPX-500 may again fall to 2645/2625-2600*/2575 and 2535/2495-2445/2385 in the near term (under bear case scenario).

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